A creditor pays originators 1.1% of loan amount plus $400 for portfolio loans. Across a significant number of transactions, it retains only five-year balloon loans and sells its other loans. Originators can influence this classification by recommending the term. Which compensation component is prohibited?
Correct Answer
C) The $400: portfolio classification is a controllable proxy for loan terms
C. The portfolio bonus uses a proxy for loan terms. The factor consistently tracks terms and the originator can influence it. Scope and exceptions: Correlation alone is insufficient without the ability to influence the factor. Source: Comment 36(d)(1)-2(ii)(A) and -9 — https://www.consumerfinance.gov/rules-policy/regulations/1026/interp-36/
Why This Is the Correct Answer
C. The portfolio bonus uses a proxy for loan terms. The factor consistently tracks terms and the originator can influence it. Scope and exceptions: Correlation alone is insufficient without the ability to influence the factor.
Why the Other Options Are Wrong
Option A: Both parts are prohibited, because 1.1% is compensation based on loan size
A fixed percentage is not prohibited merely for using loan amount.
Option B: Both parts are permitted, provided the borrower consents to the arrangement
Consumer consent does not remove the restriction.
Option D: The $400 is permitted because portfolio classification is merely internal administration
An internal label does not prevent proxy treatment.
Exam Tip
Check consistent variation and originator control.
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